Bollinger Bands is an indicator too familiar to our traders. Bollinger Bands is an indicator used to measure price volatility, developed by John Bollinger.

Like other indicators, Bollinger Bands also have important rules and precautions for use. Maybe a lot of traders trading with Bollinger Bands are not effective because they do not really understand the principle of using this indicator. You try to refer to this article, maybe it will help you see the gaps in the use of Bollinger Bands.

First, a little bit more about the Bollinger Bands indicator. Bollinger Bands consists of 3 bands, that is the upper band, the lower band, and the middle band. Inside:
  • Middle Band: The 20 SMA
  • Upper Band (Upper Band) = 20-day SMA + (20-day standard deviation of price x 2)
  • Lower Bands = 20-day SMA - (20-day standard deviation x 2)

We note further:
  • The standard deviation is usually set at 2.0 to determine the bandwidths. The higher the Standard Deviation, the harder it is for the price to reach the upper or lower band. The lower the standard deviation, the easier it is for the price to "break" the bands.
  • The symbolized Bollinger Bands (20,2) means the Period and the Standard Deviation are set to 20 and 2 respectively.
Principles of trading with Bollinger Bands

Bollinger Bands provide us with information about the direction and strength of a trend. This information can be used to confirm trading signals from other indicators or techniques.

In an uptrend:
  • The price will often reach the upper band. A touch of the upper band shows the price is pushing higher and buying is still strong.
  • When the price corrects again in an uptrend, if it is above the middle band and then returns to the upper band, this signal shows that the market is still likely to move up.
  • During an uptrend, the price should not break below the lower band, if it happens, it is a warning signal that the uptrend has slowed down and could be reversed.
In a downtrend:
  • The price will often reach the lower band. A touch of the lower band shows the price is pushing lower and selling is still strong.
  • When the price corrects back in the downtrend if it falls below the middle band and then returns to the lower band, this signal shows that the market still has a chance of a strong decline.
  • During a downtrend, the price should not break above the upper band, if it happens it is a warning signal that the downtrend has slowed down and could be reversed.

In addition, Bollinger also provides us with whether the market is in a period of strong or weak volatility. When volatility is weak, Bollinger Bands will contract, and when volatility, Bollinger Bands will expand.

5 Key considerations when dealing with Bollinger Bands
  • When the price starts moving from one bandit will tend to go to the end of the other band, so we can use this property to set trading targets.
  • When the price volatility declines and the bands begin to contract and tighten, that is often a sign of an important move or attracting attention from the market. After breaking out of this period of weak volatility, the market will move in the other direction.
  • When price volatility increases and the bands are abnormally spaced, and there is additional evidence of a top or bottom formation, it is often a sign that the market has moved too far and that the Current direction is coming to an end.
  • When the price moves outside of the band, it is usually a sign of a continuation of the trend.
  • Lows and highs form outside of the bands, but the market then fails to cross or be rejected at these highs. When the price is pushed back inside the bands it signals a trend reversal.

Conclude

It can be seen that, if we go into detail, there will be a lot of things we need to keep in mind when dealing with Bollinger Band, right?

The above content is an important note that traders should remember when trading with Bollinger Bands. If we use the role of the Bollinger Bands correctly, it can be said that this is a great indicator that can be used in any market. However, you need to combine Bollinger Bands with other indicators that confirm trading entry signals.

A few tips for trading Bollinger Bands:
  • The Bollinger Bands indicator can help you identify when the market is overbought or oversold.
  • During an uptrend, you can buy near the lower band.
  • During a downtrend, you can sell near the upper band.
  • When the Bollinger Bands is in a contraction state, it signals us that the market is "ready" to break out.